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It has been rumoured for some time, and now Microsoft has finally made a move by bidding $44.6bn bid for Yahoo.
The cash offer from the software giant values Yahoo at $31 a share, 60% higher than Thursday's closing share price of $19.18. The approach comes after disappointing fourth quarter results for Yahoo, which has recently become a target due to its deteriorating market capitalisation.
Microsoft clearly feels that a merger between the two firms offers the most effective method of competing against Google's dominance of the online ad market.
According to the letter sent by Microsoft to Yahoo's Jerry Yang:
"Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers."
The letter also reveals that the two companies, as previously rumoured, have been talking about a deal over the past year, and have "discussed a number of alternatives ranging from commercial partnerships to a merger proposal".
Yahoo has yet to respond to the offer, which will not be without its challenges if accepted (notably integration and possible employee disaffection).
Following Yahoo's decision to cull its workforce by around 1,000, Microsoft's talent acquisition team quickly started approaching Yahoo staffers, but now wants the whole company, lock stock and barrel.
It is an intruiging prospect, though the combined market share of Microsoft and Yahoo still wouldn't be enough to match Google's dominant position in the search space. It would, however, provide a better platform from which to challenge Big G.
We like the look of this mooted deal for a number of reasons, including the fact that Microsoft is a significant player in the battle for the living room, having sold almost 12m Xbox units. IPTV is still a ways away, but Microsoft has a real headstart in this area, while Google is nowhere right now.
There has been some discussion recently as to whether Google is a one-trick pony, focused as it is on search. In the years to come, Microsoft-Yahoo would be positioned as more of an all-round media group, rather than a pure search operation, despite Microsoft's traditional software business (which is under threat from many angles).
The enlarged group, were it to happen, would also make a better fist of search. Microsoft has a 20-year strategy for search, and didn't expect to usurp Google overnight, but it needs more focus. Yahoo and Microsoft have struggled in this area for a number of years, perhaps due to the distractions of having a multi-faceted businesses. Both firms are pretty much conglomerates, whereas Google remains a search business.
It remains to be seen whether the deal goes through, but we wouldn't bet against it.
Top online advertising acquisitions of 2007